Beijing balks at the political consequences of floating the yuan

AFP , SHANGHAI

When China vowed not to give in to market speculation on revaluing its currency, it underscored the Communist Party's clear understanding about the danger market economics can pose to its regime, analysts said.

It understood that a free-floating currency essentially meant party rulers would be forced to relinquish much of their control over the Chinese economy, with all the consequences that could hold for its grip on power.

China's current brand of quasi-market and central planning economics allows it to ascertain a measure of protection from what can be highly destabilizing capital market forces, as when speculators helped spark the Asian financial crisis in 1997.

"Speculation is the most powerful force in global economics today," said Andy Xie, an economist at Morgan Stanley.

"Once you open yourself to market forces and speculation then your power will be reduced and this includes political power," Xie said, adding that the revaluation issue for China was strictly a political decision, not an economic one.

As such, while China's leadership is committed to the continued reform of its booming economy, the importance of the survival of the regime means that all economic decisions are politically imbued.

Maintaining the growth of the world's fastest growing major economy is crucial to a regime that is pragmatic-minded, but stability comes first, said Li Cheng, a China specialist at Hamilton University in the US.

"Political stability carries more weight than other issues. Any wise leader will do the same," he argued, adding that "this does not mean that China will not appreciate its currency; it certainly will."

Since 1994, the yuan has been fixed at around US$8.28 under the country's pegged exchange rate system.

China's major trading partners, particularly the US, claim this level gives it an unfair advantage by making its exports much cheaper and others' imports more expensive.

So far, the Chinese leadership has resisted international pressure to alter the current rate while promising it will move towards a more flexible system ahead of full convertibility -- but only under the right conditions.

Last week Chinese Premier Wen Jiabao (溫家寶) again insisted that the yuan would only be revalued when the time was right, and at the same time toughened his line.

"Quite honestly, the more speculation [about a yuan revaluation] there is ... the more unlikely it is that the necessary measures can be undertaken," Wen said.

China's central bank also reiterated that while plans were afoot to loosen the exchange rate system, no immediate adjustments would be made.

A sharp move towards a

free-floating currency could be dangerous to its ailing banking system and therefore the economy, China says, a point that most analysts agree on.

If Beijing were to expose itself now to market forces it would likely cause a crisis in China and be very damaging to a lot of people, Xie said.

"This has to be avoided," he said, adding that reform and strengthening of its financial system were crucial before any deregulatory moves.

China's top brass are also

worried that such a move would destabilize its export-driven economy, making its goods more expensive abroad and curtailing growth at its still cumbersome state enterprises.

That in turn would lead to slower growth, which then could threaten job creation, a problem that Beijing continues to struggle with as it attempts to address a growing wealth gap and lift millions of farmers out of relative poverty.